Quebec takes an inside seat in Anticosti Island oil development

MONTREAL – The Quebec government is taking control of oil exploration on remote Anticosti, striking joint venture deals with all oil and gas companies holding permits on the island in exchange for funding their drilling programs.

The move shows, really for the first time, the unequivocal determination by the revenue-challenged Parti Québécois government to figure out just how much oil and gas Quebec may have on its territory. And it underlines the province’s resolve to take a central role in that process as a way to build social acceptability and reap the returns.

“Today, Quebec is asserting its rights over the natural resources that belong to it,” Quebec Premier Pauline Marois said in a news release.

“The potential benefits [from oil development on Anticosti] could have a determining influence on Quebec’s economy,” Ms. Marois said at a news conference Thursday, estimating the boon to the province could top $45-billion over 30 years through royalties, taxes and returns on equity. Quebec must reduce its reliance on foreign oil imports, she said.

Quebec has signed two separate development agreements for Anticosti, a picturesque island of salmon-filled streams and deer-packed forests in the Gulf of St. Lawrence. It’s there that Quebec’s hunt for for oil wealth will begin in earnest this summer.

The first is a $100-million drilling program with Canadian-based juniors Pétrolia Inc. and Corridor Resources as well as French mid-tiered oil company Maurel & Prom. It will see the province make a $70-million investment into a new exploration and development joint-venture in return for a 35% stake. The other partners will hold a roughly 21.7% interest each.

Quebec and Maurel & Prom are financing the drilling, with Maurel paying up to $43-million, while the juniors have agreed to roll their exploration licences into the joint venture. Each partner gets a board seat with one independent member to be named later.

Under the second preliminary deal with Quebec-based junior Junex Inc., the province is aiming to make a $45-million investment representing half of the total estimated drilling cost of $90-million. Junex will transfer its land rights into the joint venture for a 20% stake. Another outside partner is also being sought to join the two existing partners.

Today, Quebec is asserting its rights over the natural resources that belong to it

Critics of the deal structures might argue that the private sector companies are giving up too much in the transactions as the government strongarms them into ceding their land rights and share potential profits. But government involvement guarantees the companies will have a strategic partner with deep pockets to take them through exploration and to potential commercialization.

Raising enough money in the public markets would have been extremely difficult. Doubly so since the oil pools thought to lie under Anticosti’s Macasty shale formation are, for now, not proven.

Giving Quebec an inside seat in development also adds a formidable partner to the public acceptance equation. All the drilling work done will be shepperded by government officials with the natural resouces and environment departments. In a province in which people are increasingly skeptical of private enterprise, it’s easier for the premier, rather than a business executive, to make the argument that oil development must move forward.

“The first deal sets the tone. And I think this is a a blueprint for future transactions in Quebec,” said Vincent Joli-Coeur, vice-chairman of National Bank Financial, which is advising Pétrolia and Corridor on the transaction. “In natural resources here, you need private sector working with government as a partner. It’s not the Alberta model. It’s going to be, as we believe, the Quebec model.”

Maurel’s participation marks the first significant investment by a sizable petroleum player into Quebec, even if the total sum remains small by global standards. The Paris-based company is the second-largest French oil and gas company behind Total SA, with a market capitalization of 1.8-billion euros.

Estimates differ but there is thought to be between 30 billion and 50 billion barrels of oil initially-in-place on Anticosti Island, of which maybe 5% could be recoverable. By comparison, Alberta’s oil sands produced 1.9 million barrels of crude per day on average in 2012.

Environmental groups blasted the announcement Thursday, with the Suzuki Foundation saying the government is placing itself in a potential conflict of interest as both an oil promoter and the body responsible for applying future recommendations resulting from environmental reviews. Equiterre said the government’s decision will serious compromise its greenhouse-gas reduction objectives.

Several major oil companies such as Royal Dutch Shell and Imperial Oil have drilled on Anticosti, but they were looking for conventional oil plays, not the shale oil now thought to be there in the rock and unlockable by modern hydraulic fracturing techniques.

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